Download or read book How to Escape a Liquidity Trap with Interest Rate Rules h electronic Resource written by Fernando Duarte and published by . This book was released on 2016 with total page 92 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The author gives necessary and sufficient conditions under which interest-rate feedback rules eliminate aggregate instability by inducing a globally unique optimal equilibrium in a canonical New Keynesian economy with a binding zero lower bound. He considers a central bank that initially keeps interest rates pegged at zero for a length of time that depends on the state of the economy and then switches to a standard Taylor rule. There are two crucial principles to achieving global uniqueness. In response to deepening deflationary expectations, the central bank must, first, sufficiently extend the initial period of zero interest rates and, afterward, follow a Taylor rule that does not obey the Taylor principle. He obtains all results assuming a passive or Ricardian fiscal policy stance, so that it is monetary policy alone that eliminates undesired equilibria. The interest rate rules that he considers do not require central banks to undergo any significant institutional change and do not rely on the Neo-Fisherian mechanism of inducing an increase in inflation by first increasing interest rates."--Abstract.
Download or read book How to Escape a Liquidity Trap with Interest Rate Rules written by Fernando Duarte and published by . This book was released on 2019 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study how central banks should communicate monetary policy in liquidity trap scenarios in which the zero lower bound on nominal interest rates is binding. Using a standard New Keynesian model, I argue that the key to anchoring expectations and preventing self-fulfilling deflationary spirals is to promise to keep nominal interest rates pegged at zero for a length of time that depends on the state of the economy. I derive necessary and sufficient conditions for this type of state-contingent forward guidance to implement the welfare-maximizing equilibrium as a globally determinate (that is, unique) equilibrium. Even though the zero lower bound prevents the Taylor principle from holding, determinacy can be obtained if the central bank sufficiently extends the duration of the zero interest rate peg in response to deflationary or contractionary changes in expectations or outcomes. Fiscal policy is passive, so it plays no role for determinacy. The interest rate rules I consider are easy to communicate, require little institutional change, and do not entail any unnecessary social welfare losses.
Download or read book Liquidity Traps written by Willem H. Buiter and published by . This book was released on 1999 with total page 84 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Escaping from a Liquidity Trap and Deflation written by Lars E. O. Svensson and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Existing proposals to escape from a liquidity trap and deflation, including my Foolproof Way,' are discussed in the light of the optimal way to escape. The optimal way involves three elements: (1) an explicit central-bank commitment to a higher future price level; (2) a concrete action that demonstrates the central bank's commitment, induces expectations of a higher future price level and jump-starts the economy; and (3) an exit strategy that specifies when and how to get back to normal. A currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations. Furthermore, an intentional currency depreciation and a crawling peg, as in the Foolproof Way, can implement the optimal way and, in particular, induce the desired expectations of a higher future price level. I conclude that the Foolproof Way is likely to work well for Japan, which is in a liquidity trap now, as well as for the euro area and the United States, in case either would fall into a liquidity trap in the future"--NBER website
Download or read book Liquidity traps an interest rate based exit strategy written by Stephanie Schmitt-Grohé and published by . This book was released on 2010 with total page 14 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes a potential strategy for escaping liquidity traps. The strategy is based on an augmented Taylor-type interest-rate feedback rule and differs from usual specifications in that when inflation falls below a threshold, the central bank temporarily deviates from the traditional Taylor rule by following a deterministic path for the nominal interest rate. This path reaches the intended target for this policy instrument in finite time. The policy we study is designed to raise inflationary expectations over time while at the same time maintaining all of the desirable local properties of the Taylor principle in a neighborhood of the intended inflation target. Importantly, the effectiveness of the potential exit strategy studied in this paper does not rely on the existence of an accompanying fiscalist (or non-Ricardian) fiscal stance.
Download or read book Liquidity Trap and Excessive Leverage written by Mr.Anton Korinek and published by International Monetary Fund. This book was released on 2014-07-21 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' exante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.
Download or read book Credible Commitment to Optimal Escape from a Liquidity Trap written by Mr.Olivier Jeanne and published by International Monetary Fund. This book was released on 2004-09-01 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.
Download or read book Managing a Liquidity Trap written by Iván Werning and published by . This book was released on 2011 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study monetary and fiscal policy in liquidity trap scenarios, where the zero bound on the nominal interest rate is binding. I work with a continuous-time version of the standard New Keynesian model. Without commitment, the economy suffers from deflation and depressed output. I show that, surprisingly, both are exacerbated with greater price flexibility. I examine monetary and fiscal policies that maximize utility for the agent in the model and refer to these as optimal throughout the paper. I find that the optimal interest rate is set to zero past the liquidity trap and jump discretely up upon exit. Inflation may be positive throughout, so the absence of deflation is not evidence against a liquidity trap. Output, on the other hand, always starts below its efficient level and rises above it. I then study fiscal policy and show that, regardless of parameters that govern the value of "fiscal multipliers" during normal or liquidity trap times, at the start of a liquidity trap optimal spending is above its natural level. However, it declines over time and goes below its natural level. I propose a decomposition of spending according to "opportunistic" and "stimulus" motives. The former is defined as the level of government purchases that is optimal from a static, cost-benefit standpoint, taking into account that, due to slack resources, shadow costs may be lower during a slump; the latter measures deviations from the former. I show that stimulus spending may be zero throughout, or switch signs, depending on parameters. Finally, I consider the hybrid where monetary policy is discretionary, but fiscal policy has commitment. In this case, stimulus spending is typically positive and increasing throughout the trap.
Download or read book Liquidity Traps with Global Taylor Rules written by Stephanie Schmitt-Grohé and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: A key result of a recent literature that focuses on the global consequences of Taylor-type interest rate feedback rules is that such rules in combination with the zero bound on nominal interest rates can lead to unintended liquidity traps. An immediate question posed by this result is whether the government could avoid liquidity traps by ignoring the zero bound, that is, by threatening to set the nominal interest rate at a negative value should the inflation rate fall below a certain threshold. This paper shows that even if the government could credibly commit to setting the interest rate at a negative value, self-fulfilling liquidity traps can still emerge. That is, deflationary equilibria originating arbitrarily near the intended equilibrium and leading to low (possibly zero) interest rates and low (and possibly negative) rates of inflation cannot be ruled out by lifting the zero bound on the monetary policy rule. This result obtains in models with flexible and sticky prices and under continuous and discrete time.
Download or read book Liquidity Traps with Global Taylor Rules written by Stephanie Schmitt-Grohé and published by . This book was released on 2001 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Monetary and Fiscal Policy to Escape from a Deflationary Trap written by Yasushi Iwamoto and published by . This book was released on 2004 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a theoretical overview of monetary and fiscal policy with the potential to engineer an exit from a deflationary trap, defined here as sustained deflation in the presence of zero interest rates. It is found that the required policy steps are an interest rate hike, a commitment to future currency growth, and a money-financed tax cut. The amount of tax cut required is equal to the increase in the central bank's payments to the treasury resulting from the higher inflation rate (nominal interest rate), while fiscal policymakers must maintain fiscal discipline by stabilizing government debt and the primary balance. There will be a temporary fall in output when prices are sticky, but this is the price that must be paid to conquer deflation. The current commitment to quantitative easing is based on the assumption that the natural interest rate has temporarily declined. If the economy is in a deflationary trap, however, the continuation of zero interest rates reinforces deflationary expectations and may make it perpetually impossible to eliminate deflation. Even under conditions in which the natural rate of interest looks to be positive, if deflation persists, it is probably wise to consider a policy approach that assumes deflationary trap conditions. With this in mind, the conditions required for abandoning the current policy regime should include, in addition to consistently positive growth in the CPI, a consideration of the trend in real GDP.
Download or read book Avoiding Liquidity Traps written by Jess Benhabib and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Once the zero bound on nominal interest rates is taken into account, Taylor-type interest rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps since monetary policy is ineffective in bringing about the government's goals regarding the stability of output and prices. This paper proposes several fiscal and monetary policies that preserve the appealing features of Taylor rules, such as local uniqueness of equilibrium near the inflation target, and at the same time rule out the deflationary expectations that can lead an economy into a liquidity trap.
Download or read book Liquidity Trap Prevention and Escape written by Junning Cai and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Liquidity traps occur when the natural nominal interest rate becomes negative. In a model with capital price dynamics explicitly considered, we find that shocks in the future can cause current and lasting liquidity traps. We propose that the central bank can prevent or fix liquidity traps by appending to its inflation-targeting monetary policy with a prioritized promise to defend a lower bound of nominal capital price.
Download or read book Enabling Deep Negative Rates to Fight Recessions A Guide written by Ruchir Agarwal and published by International Monetary Fund. This book was released on 2019-04-29 with total page 89 pages. Available in PDF, EPUB and Kindle. Book excerpt: The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.
Download or read book The Liquidity Trap the Real Balance Effect and the Friedman Rule written by and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates, using a model with population growth that nests, as a special case, a more conventional specification in which there is a single infinitely lived representative agent. The paper shows that with a growing population, monetary policy has distributional effects that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive.
Download or read book Inflation Expectations written by Peter J. N. Sinclair and published by Routledge. This book was released on 2009-12-16 with total page 402 pages. Available in PDF, EPUB and Kindle. Book excerpt: Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.
Download or read book The Liquidity Trap in an Open Economy written by Willem H. Buiter and published by . This book was released on 2001 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
